Driving the Day
1. Voulez-vous poulet avec moi?
Mankind has come a long way from the days of divining the future by examining chicken entrails.
Or has it? After all, analysts and industry insiders are now looking to poultry as an augur of things to come in the US-China trade war:
- On Thursday, the United States Department of Agricultureposted an unpublished regulation to the Federal Register website that would allow the importation of certain Chinese poultry products into the US.
- Likewise, China is reportedly considering lifting a ban on American poultry.
Some context: Last month, China said that it would be willing to lift the chicken ban as part of the proposed phase one trade deal.
That’s not the only encouraging omen.
On Thursday, nine Chinese traffickers were sentenced for smuggling fentanyl into the US.
- The arrests werepart of a joint operation between US and Chinese law enforcement.
Why it matters: The export of Chinese fentanyl to the US is a major bone of contention between the two sides – with the US urging China to do more to stem the flow of narcotics.
Get smart: While small, these conciliatory gestures suggest a phase one deal may soon be at hand.
Federal Register:Eligibility of the People’s Republic of China to Export to the United States Poultry Products from Birds Slaughtered in the PRC
Bloomberg:USDA to Allow Chinese Poultry Imports in Sign of Trade Progress
Reuters:China considers removal of U.S. poultry import restrictions: Xinhua
BBC:Fentanyl smugglers: Nine jailed in landmark US-China operation
2.Data dump – trade
Monthly trade data for October dropped on Friday morning.
The key takeaway: The stats weren’t great, but they were better than expected – so we’ll call it a win.
- Exports fell by 0.9% y/y – up from a 3.2% contractionin September, and beating expectations ofa 3.9% fall.
- Imports fell by 6.4% y/y – up from-8.3% in September, and beating expectations of -7.8% growth.
Quick take 1: October’s exports improvement had nothing to do with the trade talks.
Quick take 2: Imports have contracted for six consecutive months on a y/y basis – underscoring the weakness in the domestic economy.
Get smart: The fact that we are cheering slightly-less-negative imports and exportshighlights just how sluggish China’s economy currently is.
What to watch: Overall growth in China will end the year with a thud.
3. MSCI to increase weighting of China stocks
Foreign investors continue to ramp up their Chinese equity purchases – a trend that is set to continue as China integrates further into global financial markets.
The latest: Yesterday, MSCI announced that it is set to boost the presence of A-shares in a key emerging market index.
- About 175 mid-cap mainland China stocks will soon be included.
- The weighting of 268 large-cap mainland stocks that are already in the index will be increased
The move will go into effect on November 26 and increase the overall weight of A-shares in the index to 4.1% – up from 2.55% at present.
Some context: This is the thirdincrease of A-share weights by MSCIthis year.
More context: Given recent noises about a potential US-China “financial war,” the move comes amid some controversy:
- “The [development] comes a day after a group of U.S. lawmakers introduced legislation that would block a federal retirement fund from investing in Chinese stocks.”
Get smart: The controversy is largely manufactured. Mainland stocks have long been underrepresented in global indexes, and we expect a number of global indexes – tracking both equities and bonds – to continue to slowly increasetheir China weightings.
4.State Council takes aim at pig prices
The State Council did its thing on Wednesday, holding its weekly executive meeting.
Top of the agenda: Stabilizing food prices.
Some context: Shortages caused by African Swine Fever have caused pork prices to skyrocket. The latest figures had them up nearly 70% y/y.
That’s got Premier Li Keqiang worried (Xinhua):
- “We must be clear-eyed about the challenges in agriculture.”
- “In particular, the relatively fast CPI rise deserves our close attention.”
So policymakers promised to make it easier to raise hogs:
- “The meeting urged efforts to take multi-pronged steps to restore hog production at a faster pace, by removing unjustifiable farming bans across the country.”
The government also realizes it needs to help people cope with rising prices:
- “Local governments should…link social assistance with price rises to meet basic livelihood needs of those living in difficulty.”
Get smart: Chinese leaders are terrified of inflation. Hyperinflation was a big reason that the CCP was able to topple the Nationalists in the late 1940s. It was also one of the big drivers behind the 1989 Tiananmen protests.
5.State Council to ease foreign investment concerns
On Thursday, the State Councilissued alist of tasks to push various government ministries to encourage more inbound foreign investment.
It looks like policymakers are attempting to address some key concerns of multinational corporations (MNCs).
Key items include:
- Forbidding forced technology transfers
- Requiring equal participation by foreign and Chinese companies in standards making – specifically encouraging MNCs to participate in standards for medical devices, food, drugs, and information products
- Banning government discrimination against MNCs in the government procurement process
On market access, the document requires:
- Further reductionin the number of items on investment negativelists – both nationwide and in Free Trade Zones (FTZs)
- Removal of restrictive measures outside of the negative lists
- Delegation of approval powers for market access in FTZs
Officials also want it to be easier for MNCs to:
- Expand cross-border use of the RMB
- Make foreign exchange payments
- Choose how they want to borrow foreign debt
The financial industry also got some love:
- All restrictions on the scope of business for foreign banks, securities companies, and fund management companies will be eliminated.
Get smart: The past 18 months havebeen a great window for MNCs to voice their opinions onregulatory challenges – andhave them heard.